A Forum Shopping Lesson

Whether a lawsuit against an insurer is brought in a state or federal court can make a significant difference to the insured's likelihood of success. Insurers typically prefer federal court, while state court tends to be more friendly toward insureds. While state courts have broad jurisdiction, federal courts can only hear cases involving a question of federal law or a dispute where there are a diversity of parties (they are from different states). Insurers who are about to deny a claim can take advantage of the federal law known as the Declaratory Judgment Act ("DJA") in order to file a preemptive lawsuit. They often do right as they send out the denial letter when they feel the case may go to litigation.

A recent Ninth Circuit decision highlights the importance for the insured to make the first move. It shows that once an insurer files in federal court, it can be nearly impossible to move the case to state court.

In Seneca Ins. Co. v. Strange Land, Inc., 17 C.D.O.S. 6554 (Jul. 5, 2017), Seneca, the insurer, filed an action in federal court seeking a declaration of non-coverage under the defendant insured’s policy and to recover monies already paid on the claims. A few months later, a third-party filed a new lawsuit in state court against both the insurer and insured, seeking compensation for the repair work it performed on the insured’s property. Strange Land raised claims against Seneca for breach of contract and bad faith. Seneca moved to dismiss or stay (pause) the state action in light of the pending federal action, and Strange Land filed a request for abstention in the federal action. The federal District Court granted Strange Land’s request, and stayed the federal action, allowing the case to proceed entirely in state court.

Seneca appealed, and the Ninth Circuit vacated the District Court's order staying the federal action. The Ninth Circuit explained that federal courts have nearly an unflagging duty to hear cases within their jurisdiction, and only in “exceptional circumstances” may a federal court abstain from asserting its jurisdiction. The mere fact that “parallel proceedings” are going on in both state and federal courts is not a reason to abstain in most instances, particularly when the federal action was filed first and the federal court has jurisdiction to resolve all of the disputes and accommodate all of the parties.

Notably, there is favorable precedent in California relaxing the stringent standard the Ninth Circuit reiterated. However, it only applies when the federal action is only for declaratory relief and nothing else. When it is also for money damages, like it was in this case, where Seneca asked for the return of money paid, the strict standard described by the Ninth Circuit applies. Thus, it is even more important to consider this issue when a dispute is brewing and the insurance company has already made an advanced payment.

This case is a good reminder of obtaining professional advice as early as possible when a dispute arises. The forum in which an insurance case proceeds is exceedingly important. Insurance companies understand this. It is important that the policyholder does, too.